STEPHANOPOULOS: Stocks climb, and the White House talks up the
economy.

(BEGIN VIDEO CLIP)

PRESIDENT BARACK OBAMA: We're going to get through this.

(END VIDEO CLIP)

(BEGIN VIDEO CLIP)

(UNKNOWN): What we need today is more optimism.

(END VIDEO CLIP)

(BEGIN VIDEO CLIP)

(UNKNOWN): There's no safer investment in the world.

STEPHANOPOULOS: Are we closer to a bottom?

Will Obama's plan speed the recovery? And how will Congress
respond?

Questions this morning for our headliners, the president's top
economic adviser Larry Summers and the Senate's top Republican, Mitch
McConnell.

Then...

(BEGIN VIDEO CLIP)

JON STEWART, HOST OF "THE DAILY SHOW": The financial news
industry is not just guilty of a sin of commission.

(END VIDEO CLIP)

STEPHANOPOULOS: Has the financial crisis spread to journalists
(inaudible)?
That, and the rest of the week's politics on our roundtable with
George Will, Frank Rich of the New York Times, BusinessWeek's Jim
Ellis, and Robert Kuttner from the American Prospect.

And, as always, the Sunday funnies.

(BEGIN VIDEO CLIP)

CRAIG FERGUSON, HOST, "THE LATE LATE SHOW: Here's how bad the
economy is. "Sesame Street" has had to lay off 67 people. Now all
the characters are living in garbage cans.

(LAUGHTER)

(END VIDEO CLIP)

ANNOUNCER: From the heart of the nation's capital, "This Week,"
with ABC News chief Washington correspondent, George Stephanopoulos,
live from the Newseum on Pennsylvania Avenue.

STEPHANOPOULOS: Hello again. Those glimmers of economic hope
brought some relief this week. But this morning's headlines on the
government bailout has the feel of Groundhog Day.

We learned, overnight, that the insurance giant, AIG, which has
received $170 billion taxpayer dollars will start paying out today
$165 million in employee bonuses.

The company says it has no choice. A contract is a contract.

For the first public response from the Obama administration, I'm
joined by the president's top economic adviser, Larry Summers.

Welcome back.

So let's -- let's get this straight, here. AIG informed the
government this week. We know that Treasury Secretary Tim Geithner
complained, on Wednesday, to the chairman, and was told basically
there's nothing we can do.

And I think a lot of people simply don't understand, how can this
be, especially when these bonuses are going to be going to the
financial products division of the company which brought the company
down?

SUMMERS: George, look, there are a lot of terrible things that
have happened in the last 18 months, but what's happened at AIG is the
most outrageous, what that company did, the way it was not regulated;
the way no one was watching, what's proved necessary is outrageous.

We are a country of law. There are contracts. The government
cannot just abrogate contracts. Every legal step possible to limit
those bonuses is being taken by Secretary Geithner and by the Federal
Reserve system.

STEPHANOPOULOS: But, basically, I mean, tell me what's wrong
with this analogy. Had the government allowed AIG to go into
bankruptcy, these bonuses wouldn't necessarily have been paid.

We prevented AIG from going into bankruptcy for good public
policy reasons, so why doesn't the government to have the right to at
least limit these bonuses?

SUMMERS: The government -- look, I'm not a lawyer, George, and
when the original agreements were reached, I wasn't part of the
government and party to them.

What the Obama administration has done, based on the advice of
attorneys, is done everything it can to, within the law and within the
tradition of upholding law that we have in this country, to limit
these bonuses.

And they have, as a result of Secretary Geithner's efforts, been
scaled back.

And, obviously, this whole area is something we're going to have
to look at, as we think about regulation in the future. Because no
one can be satisfied with -- with what's happened. And in many cases,
we just can't continue to do it -- to do it in this way.

It is outrageous. We are a nation of law, where there are
contracts. And there is one other reality we have to recognize, which
is that these companies have to be enabled to function, if the
government is going to maximize the prospect of getting its money
back.

STEPHANOPOULOS: There's a second issue that has to do with
transparency. About $50 billion that went to AIG, from the taxpayers,
has gone straight to their counterparties.

Now, it's been reported that these are banks like Goldman Sachs
and Merrill Lynch, and some European banks, yet AIG won't say where
this money has gone, won't release who these counterparties are.

And, secondly, a lot of experts wonder -- and Gretchen Morgenson
asked this in the New York Times this morning. Why weren't these
counterparties forced to take some kind of a haircut?

STEPHANOPOULOS: Why were they made completely whole?

SUMMERS: George, both questions are very fair questions. The
Federal Reserve is the party to that portion of the agreement with
AIG. And my understanding is that they're working with AIG on exactly
this issue and getting the legal...

(CROSSTALK)

SUMMERS: ... getting the legal things that are necessary for
disclosures. In just what way or just when, I can't tell you.

STEPHANOPOULOS: But the president wants that disclosed?

SUMMERS: Because it's the Federal Reserve...

(CROSSTALK)

SUMMERS: We'd like to see as much -- we would like to see as
much transparency as is legal and is consistent with -- with market
functioning. We don't have the ability, under law -- and it's one of
the crucial things that, as we move to financial regulation, that the
president and Secretary Geithner have emphasized that we need to have,
a so-called resolution regime.

It's a technical thing. But it's basically a legal framework in
which you're able to work these things out by -- by not needing
bailouts and instead being able to limit payments in the way that a
bankruptcy does.

But it's not something, as, frankly, we saw in the aftermath of
what happened at Lehman, that you can just do in arbitrary or a
higgly-piggly kind of...

(CROSSTALK)

SUMMERS: ... kind of way.

STEPHANOPOULOS: So, again, there's nothing that can be done
about it?

SUMMERS: No, there are things -- there are things that can be
done. That's why, in the context of financial regulation, we're
working to put all these derivatives on exchange, and so it can all be
netted out across all the parties, rather than simply being a contract
that somebody is saying has to be -- has to be enforced.
STEPHANOPOULOS: But to be clear, the president would like to
know who got these funds, and you believe that there should be a
haircut?

SUMMERS: I believe that, in principle, in situations of this
kind, there should be a framework that permits -- that permits
haircuts, so that the situation can be worked forward.

And Secretary Geithner, as he works on financial regulation, is
focused on that -- achieving that objective. But there's a very
different situation...

STEPHANOPOULOS: Going forward, not looking back?

SUMMERS: That's a different situation than saying that we can
just change the rules -- change the rules ex-post.

Look, if you start changing the rules, ex-post, on financial --
on these kinds of contracts, you may get a feeling of satisfaction in
the short run. But the president said something very, very important,
George, in his State of the Union speech.

He railed and spoke very powerfully against what has happened.
And then he said, "but we can't govern out of anger."

And what's being done here -- no one wants to be doing these
things. No one wants to see money going for this purpose, with all
the needs that our country has.

But at the same time, if we don't contain this situation; if we
don't respect laws on which people reasonably relied, the potential
chaos, disruption, lack of credit, resulting unemployment will be that
much greater. Those are the agonizing judgments that our financial
authorities have to make.

STEPHANOPOULOS: You say we can't govern out of anger. You and
the president were also trying to inspire hope, this week, on the
economy; some signs of some progress, and of course, that move in the
stock market this week.

Is an economic bottom in sight?

SUMMERS: George, no one can make that -- no one can make that
judgment. You know, the president said something else that was very
wise. He said, you know, "It's never as good as people say it is when
they say it's good and it's never as bad as people say it is when they
say it's bad."

Clearly, the fact that consumer spending was like a ball falling
off a table through the holiday season, and that there does seem to be
some sign of stability in January and February is better than if that
were not the case.

But we've got an economy that's losing 600,000 jobs a month.
That's probably not going to stop imminently.
And so, while there is signs that some of the things that the
president is doing are starting to have effects, these problems did
not get made overnight. They didn't get made in a year. And they're
not going to get fixed very rapidly, either.

But what we have to do is put in place a program. And the
president is doing that, with jobs, with housing, with the flow of
credit; tomorrow, with small business, to put in place a program that
addresses the crucial problems and permits stability to be -- to be
regained. But it's going to take some time.

STEPHANOPOULOS: How about the news on the banks, specifically?

We learned this week, from Citigroup, from Bank of America, from
JPMorgan, that they were all -- claimed to be profitable so far this
year.

And I wonder what you make of that, and what you think our
viewers should make of that. Does that mean -- especially the real
problem banks, so far, at least reported to be problem banks,
Citigroup and Bank of America -- does this mean they're out of the
woods?

SUMMERS: I don't think that -- I wish I could say that. I wish
-- just as I wish I could say that the fact that the stock market was
up meant that the country was out of the woods or the fact that
consumer spending had been strong meant that the country was out of
the woods.

SUMMERS: Clearly, it's better for banks to be profitable in this
sense, when they're short of capital, than if they were losing large
amounts of money. But there are very fundamental issues in the
banking system, principally having to do with this very large quantity
of so-called toxic assets that people don't understand very well.

And so they don't have the trust on which a financial system
depends, and which inhibit, because of all of that uncertainty and
distrust, their capacity to lend. And while this is encouraging
information, it doesn't mean that that problem is being removed. It's
a problem that's going to take time. And it's a problem that's going
to take strong policy.

The policy starts...

STEPHANOPOULOS: But I want to get to that because it's my
understanding that the president had a meeting of his economic team
Tuesday night and finalize the outline of how to deal with these toxic
assets. Treasury still working on the details.

Let me try to explain in layman's terms and you tell me where I'm
getting it wrong. Basically the government wants to set up a public-
private partnership where both the government would try to encourage
hedge funds, other private investors to get into these markets to try
to buy these toxic assets from the banks by putting up some money,
also giving them financing.

And that if the investments made money, the government gets paid
back. But if the investments lose money, the most the investors could
lose would be their down payment. They're going to have the loan
forgiven.

Some economists have criticized that plan, including Paul Krugman
of The New York Times. And here's what he says about it. He says:
"The administration would shower benefits on everyone who made the
mistake of buying the stuff. Some of those benefits would trickle
down to where they're needed, shoring up the balance sheets of key
financial institutions. But most of the benefits would go to people
who don't need or deserve to be rescued."

Your response?

SUMMERS: Well, I think it's much better to have the president
and have Secretary Geithner lay out their approach so that everyone
can see it. I'm not sure I understand Professor Krugman's argument.
If you support this market, you enable, for example, lower
mortgage rates. I think the benefits of that go to the people who
really should see those benefits. If you provide support for the
credit markets, you increase the supply of student lending because
people who make student loans can sell them off their balance sheet
and then be in a position to make new student loans.

Whether it's car loans, what have you, restarting our capital
markets is essential if we're going to be able to get this credit flow
going. And this credit flow is, in turn, essential for consumer
confidence using...

STEPHANOPOULOS: Even if that means taxpayers taking almost all
of the risk?

SUMMERS: Well, they're not taking all. They're not taking
anything like all of the risk, George. No taxpayer in these
arrangements is going to lose money until the investor who put up the
money has lost 100 percent of their...

STEPHANOPOULOS: Of their down payment?

SUMMERS: Down -- of the money they put up. So until whoever it
is who buys it, whether it's an insurance company or a hedge fund,
until whoever it is who buys it is completely wiped out, the
government financing isn't going to be touched at all.

And there could be a lot of care given to make sure that those in
effect down payments are large enough that the government's interest
is protected.

STEPHANOPOULOS: Yesterday -- earlier on Friday, we saw the
Chinese premier, Wen Jiabao, say that he was worried about his
investments, $1 trillion investment in U.S. Treasury bonds.

The president and you pushed back hard yesterday, saying that
everyone should have confidence in the American economy. But I
wonder, what do you think the premier was doing there? Was that
saber-rattling?

SUMMERS: Oh, look, I have a hard enough time, frankly,
understanding the motives of all of the things that political people
here in Washington say without trying to establish the political
motives of political statements that come out of China.

But I'll say this, George, what has been very striking in this
time of financial distress, even with all of the financial problems
that we've had, is the way in which capital has flowed into the United
States. In the way in which people have seen U.S. Treasuries as a
place where their money is safe, where there is a liquid and deep
capital market.

Now we've got to make sure to keep it that way. And that's why
the president's budget puts a lot of emphasis on the need to have the
budget deficit he inherited over the next four years, and put the
country's finances on a sound basis after the -- as the economy
expands.

STEPHANOPOULOS: I want to get to the budget because Mr. --
Senator McConnell is about to come up, the Republican leader in the
Senate. He says he has only three problems with the president's
budget. It spends too much. It taxes too much. And it borrows too
much. Your response?

SUMMERS: We'd love to see Senator McConnell's concrete
alternatives that gets closer to a balanced budget. The situation the
president inherited of nearly $1 trillion deficits, before he did
anything, came at a time -- came at a time when it was a Republican
president and a Republican Congress that were making the decisions.

I believe the approach that the president is taking, which
represents the first serious effort to contain health care costs in
many years, that is going to stop going forward the practice of
earmarks, that's going to monitor every federal expenditure in this
stimulus program where people can see it on the Internet, I think it's
the right kind of approach. It's the largest cuts in, you know, this
category, George, so-called domestic discretionary spending.
Basically, the non-Social Security, non-Medicare, non-defense part of
the budget, it's getting cut more strongly than it has in any budget
that's been proposed in many years.

So I think what the president is proposing is a strategic budget.
It is making substantial cuts, but it's also providing support in some
important areas, like education, like health care, like taking the
steps that are necessary to make us less dependent on foreign oil and
start addressing global climate change that will let us have a sound
economic expansion.

STEPHANOPOULOS: OK, Larry Summers, thanks very much for your
time this morning.

SUMMERS: Thank you.

STEPHANOPOULOS: Let's get the response right now from Senator
McConnell. He's down in Louisville, Kentucky. You heard Mr. Summers
there, Senator. Will the Republicans in the Senate be providing an
alternative budget?

MCCONNELL: Well, first, let's take a look at the budget the
president is offering. That's his responsibility. The majority has a
responsibility to lay out their plan, George, for the next few years,
and they've done it. It will double the national debt in five years
and triple the national debt in 10 years. It taxes too much, it
spends too much, it borrows too much, as you indicated.

What I have said and our colleagues have said repeatedly, it does
what the president's chief of staff -- he was pretty candid about it
-- they're taking advantage of a crisis in order to do things that had
nothing to do with getting us into the crisis in the first place.
They want to have a massive expansion of health care. An energy
tax, which many people are now calling a light switch tax, of another
$600 billion. It's sort of bait-and-switch.

What we really ought to be doing here is concentrating on fixing
the financial system, which you did ask Secretary Summers about a good
bit, and the housing problem. But not using this crisis as an excuse
to go on an explosion of spending.

One other point. We have already authorized this year in the
first 50 days of this administration, spending at the rate of $24
billion a day, or $1 billion an hour. Another way of looking at it,
just putting it in context, this $1.2 trillion that we've spent in the
first 50 days is more than the previous administration spent after
9/11 on Iraq, Afghanistan and the response to Katrina.

STEPHANOPOULOS: Well, Senator, there's a lot of criticism there,
but no alternative. And the Democratic Party and the White House are
going to make a real push to paint you as the "just say no" party.

Look what the DNC has put up on their Web site. They have this
clock showing that it's been 16 days, 20 hours and 18 minutes and
counting since you've had a budget. An outside group called Americans
United for Change is putting out this ad this morning making the same
point. Listen.

(BEGIN VIDEO CLIP)

UNKNOWN: The Republican response?

UNKNOWN: No.

UNKNOWN: No.

UNKNOWN: No.

UNKNOWN: So what kind of budget have the Republicans proposed to
get us out of the mess they created? Here are the details.

That's right. Nothing.

(END VIDEO CLIP)

STEPHANOPOULOS: So will you have a budget, and are you worried
about that attack?

MCCONNELL: No, we are going to offer a number of amendments to
the Democratic proposal.

STEPHANOPOULOS: But no comprehensive budget?

MCCONNELL: Well, it will reframe what the Democrats recommend
for America over the next five and 10 years. And I assure you, the
amendments that we offer will not lay out a blueprint for doubling the
national debt in five years and tripling it in 10 years. That is not
what we think...
STEPHANOPOULOS: But shouldn't you have to have a comprehensive
approach that lays out the tradeoffs? If you just have rifle shot
amendments, you don't have to make all the tradeoffs that you have to
make in the overall budget.

MCCONNELL: Well, we're just sort of getting down in the weeds
here over procedure. Through the amendment process, we would
absolutely reformulate the Democratic plan. Whether you have a
comprehensive approach or whether you offer an amendment approach is
something that parliamentarians can debate, but the point is, we're
going to have alternatives, just like we had alternatives when they
offered the massive stimulus package.

MCCONNELL: We would have spent half as much money, we would have
fixed housing, and put money back into pockets of taxpayers. So we
have offered alternatives all along the way, and we will offer
numerous alternatives on the budget when it comes up.

STEPHANOPOULOS: Let me ask you about AIG. You heard me talking
to Mr. Summers about that earlier, and he said, you know, he's
outraged. The president is outraged and as angry as anyone else, but
there's nothing the government can do. Do you accept that?

MCCONNELL: Well, it is an outrageous situation. I wrote
Secretary Paulson back in October complaining about the way AIG had
been doing its business.

The point here is, if you're going to take the government as a
partner, the message here, I'm afraid, to any business out there
that's thinking about taking government money, is let's enter into a
bunch of contracts real quick, and we'll have the taxpayers pay
bonuses to our employees.

This is an outrage. And for them to simply sit there and blame
it on the previous administration or claim contract -- we all know
that contracts are valid in this country, but they need to be looked
at. Did they enter into these contracts knowing full well that, as a
practical matter, the taxpayers of the United States were going to be
reimbursing their employees? Particularly employees who got them into
this mess in the first place. I think it's an outrage.

STEPHANOPOULOS: And on the bank plan, the president's bank plan,
we're going to be seeing the final details in the next couple of
weeks, but last week, your colleague, Republican Senator Richard
Shelby of Alabama, the ranking Republican on the Senate Banking
Committee, made it clear that he wasn't for any kind of a bailout for
these banks. In fact, he wants to shut the worst ones down. Take a
listen.

(BEGIN VIDEO CLIP)

SHELBY: Close them down. Get them out of business. If they're
dead, they ought to be buried. We buried the small banks. We got to
bury some big ones, and send a strong message to the market.

(END VIDEO CLIP)

STEPHANOPOULOS: Do you agree with Senator Shelby?
MCCONNELL: Well, I'm open to talking about fixing the financial
system. I supported the financial rescue package back in October, and
so I'm anxious to look at what the administration would like to do. I
don't know whether it will end up requiring our consent or whether it
will be done on the basis of authorization that's previously been
given to them, but I'm willing to listen to them.

STEPHANOPOULOS: So you're not for closing down the banks?

MCCONNELL: I'm for closing down -- a lot of that is happening
already. And a number of banks have been closed down by the FDIC, as
you know.

STEPHANOPOULOS: But how about the big ones like Citigroup, Bank
of America, the large banks that could lead -- that some people claim
are too big to fail?

MCCONNELL: Well, you know, we thought back in October, when we
voted for the financial rescue package that the package was going to
go after toxic assets. And unfortunately, it ended up being a capital
investment. We all kind of held our noses and supported it, because
they said that we're going to have a financial meltdown. 74 out of
100 senators believed that to be the case. So we'll have to see what
they recommend.

STEPHANOPOULOS: But you're open to it, to be clear, open to
including more funds then?

MCCONNELL: I want to see what they recommend, George. I'm not
just going to say, without even looking at it yet, that this makes no
sense. But I have been very, very skeptical of everything that's
happened since the initial financial rescue package. We're now moving
into basically industrial policy, by trying to rescue the automobile
companies who ought to be making very tough decisions themselves. I
think skepticism among my colleagues for additional bailouts is very,
very high, and that includes me.

STEPHANOPOULOS: OK. Senator McConnell, thanks very much for
your time this morning. Congratulations, Louisville winning the Big
Eight last night.